Cisco’s Downbeat Forecast Raises Concerns about Share Losses in Core Business

In the wake of Cisco Systems Inc.’s latest downbeat forecast, analysts have expressed their concerns about the networking giant’s performance. Cisco customers are currently adjusting to their recent purchases, resulting in a slowdown in new-order momentum. As a result, the company has revised down its full-year revenue forecast, which has raised eyebrows among analysts.

Needham analyst Alex Henderson finds it difficult to align their revenue estimate with Cisco’s guidance. By his calculations, networking could decline by more than 20% in the fiscal second quarter, followed by a 15% decline in the fiscal third quarter, and a projected decline of at least 5% to 10% in the fiscal fourth quarter. Henderson believes these numbers solidify the notion that Cisco is losing market share in its core business. Additionally, he suggests that Cisco’s comments indicate that the services business is growing, implying an even steeper decline in product sales than what was forecasted.

Meanwhile, William Blair analyst Sebastien Naji remains cautious about Cisco’s strategic shortcomings. Despite acknowledging that the stock is not expensive and that Cisco is known for its execution capabilities, Naji predicts challenges in exceeding estimates and achieving multiple expansion in the future. While generative artificial intelligence could provide some tailwinds for Cisco, Naji believes that competitive pressure and market share losses across various product segments may limit upside potential.

Naji also points out that the deceleration in order growth could be attributed to a pause in spending related to deployments. However, he also highlights increased competition as a factor contributing to market share losses across multiple product segments.

Overall, Cisco’s downbeat forecast has raised concerns among analysts about the company’s performance and market share losses in its core business. As a result, the stock has experienced a significant decline in premarket trading.

Cisco Faces Investor Scrutiny Amidst Weakness in Earnings

Cisco’s recent stock weakness has been attributed to inventory-digestion issues rather than macroeconomic problems, according to the company’s management. However, investors may remain skeptical until they gain more confidence in this explanation. Analyst Amit Daryanani from Evercore ISI suggests that Wall Street wants assurance that there won’t be any additional negative surprises for Cisco. Daryanani, who had an outperform rating and $55 target price on the stock, believes that patient value investors could see the upside potential of Cisco reaching $4.50-5.00 in earnings per share after the Splunk acquisition closes, which could lead to the stock price rising to the “mid-70s.”

Before the recent report, Cisco’s shares closed at $53.28 but were indicating a decrease to around $48 in premarket activity on Thursday.

Piper Sandler analyst James Fish had concerns about a potential third cut and an enterprise slowdown prior to the report. He also believes that the networking sector is currently experiencing a “downcycle,” and Cisco’s results confirm his view that estimates for Cisco and its peers may be too high for 2024-2025. Fish acknowledges that Cisco’s deal for Splunk could have medium-term potential but suggests that given the current market dynamics, the stock is likely to remain range-bound even with its lowered valuation. As a result, Fish lowered his price target for Cisco to $50 from $57 while maintaining a neutral rating.

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